Essentials
In my last post, I talked about the value of using a professional team to support the operation and management of your professional corporation.
However, even if you outsource your PC’s management, it’s helpful to understand the following list of the minimal steps that will need to be addressed as you operate your small business. There may also be some local regulations that you have to follow in order to maintain your PC. Each state has different requirements for PC reporting and tax filing, so make sure you understand what is expected where you live.
Many owners will choose a registered agent to provide these essential services for them, and they will always include the following items:
- State Report -Most states will require an annual or biennial report to the state to update business information such as registered agent, officer(s), business address, mailing address, and email.
- Taxes -File annual federal and state income taxes. Pay federal, state, and local taxes for any employees via estimated quarterly withholding. Register to pay state unemployment insurance taxes. Provide annual W-2 earnings statements to any employee. Provide annual K-1 statements to shareholders.
- Annual Board of Directors Meeting and Minutes – Most states require you to record annual shareholder and board of director meeting minutes. Important items to include in this document are the meeting’s date, time, location, who wrote the minutes, the names of the members in attendance, a brief description of the meeting agenda, details about what the members discussed, decisions made, or voting actions are taken, and election of officers. Typically your agent or attorney can help provide these minutes for you and record them for you
Involving Your Spouse
You’ll note that these steps associated with maintaining your PC include a mixture of both legal and accounting components. Thus having an accountant and lawyer who work well together is extremely helpful, but a comprehensive team is even better.
It would also be worthwhile to note that keeping accounting books, payroll, bank management, and other business functions are not mandated by the state or federal authorities but are fundamental to the smooth operation of any small business. A common approach that I observe for managing these areas involves employing a spouse to keep the books and manage the items. Employing your spouse through your PC unlocks numerous benefits to your household that can help you retain more income. This includes having the ability to open tax-advantaged retirement plans for both you and your spouse through your corporation. When both spouses are utilized within your corporation, you can grow your household net worth faster.
Tax Implications
When employing a spouse in your business it is important to understand how the money flows into your home and the tax implications for each spouse. In comparison to a traditional W-2 income that is received by the physician from a large corporate employer, now your own small corporation will be paying both you and your spouse’s W-2 income. In this model typically the physician’s spouse will want to lower their salary to the lowest IRS-compliant “reasonable salary”. In contrast, the other spouse picks up some of the additional income. This means you will have two channels of W-2 income in your home. When this is analyzed carefully the net benefit is often lower taxes for the household than if the money arrived via the physician’s high income alone. Because this process also creates additional payroll taxes that could offset the expected retained income, a tax professional should assist you in the analysis to maximize the efficiency. It is important to assess the overall family tax consequences to figure out the most tax-efficient salary to pay the second spouse. As an example, it may make good financial sense to pay $25K in salary to the non-physician spouse and have $20.5K of it go into their retirement account, which leaves only $4,500 of taxable income
Small business & Household Cash Flow
The other elements of the analysis involve the additional ways that money flows into your home differently than traditional W-2 physician employees. Within a PC the W-2 income from you and your spouse along with tax-advantaged household income, business distributions, and larger retirement fund options all add up to tax-advantaged opportunities that will lead to retaining 10-15% more of your earned dollars than if received it via traditional employment. It’s the sum total of each of these categories for the small business person that provides them household financial advantages over a simple employee.
All of this is exactly how I have organized things within my PC as my spouse is paid to be the bookkeeper. Beyond sharing the workload and the financial benefits, this arrangement provides the additional benefit of unifying our joint operation of the small business. I realize every household’s situation is different regarding how this works best works, so it does have to be individualized to your specific household structure. Thus, you should work with your accounting services professional to sort out what will be best for you in regard to your bookkeeping, accounting, and tax workflow.
Costs to maintain
In maintaining your PC, you will typically want to engage a lawyer and/or an accounting professional due to the steps connected with maintaining your small business.
Depending on the scope of your PC’s business activity, your annual legal, accounting, and tax management fees could range from $500 to $25,000 annually. If you do most of the work yourself through online services like Quickbooks and TurboTax, you can maintain a simple micro-PC for a small amount of money annually.
I know that is a wide range, but the size of your PC’s business activities can vary widely from person to person. The complexities of your business operation in connection with the scope of services provided by an accountant will determine the size of the costs.
For example, if you use your PC through your primary job in an employment lite agreement, the cost will be higher because you will be flowing $200,000 to $1 million dollars through our PC business architecture. The more money involved, the more sophisticated the system must be to help retain more income for your household. On the other hand, if you use your PC solely to flow side income, there will be less business activity, and thus less complexity with the business operations. Extreme do-it-your-self doctors can save lots of money through self-management by using online services for bookkeeping, business activity, banking, and taxes. But again, I would be cautious about not taking on too much here. However, if you are setting up your PC in baby steps, you probably can do it yourself at the beginning.
Choosing to start a PC and then maintaining it will cost you money, so carefully consider the costs. However, in most cases, it will easily pay for itself financially and more importantly, it will holistically make your life better due to the way it helps preserve your autonomy.
It’s Deductible
Remember that these business operation expenses are deductible from your corporation and thus can and should be viewed differently than normal consumer purchases that come from your household expenses. For example, purchasing a car for $25,000 is an income-losing, depreciating asset deducted from your household funds. However, a PC is an income-producing, income-retaining, and appreciating asset that is purchased by you and takes no money from your household funds.
The Cost To Outsource To An Agency
When I started a PC and converted to an employment lite agreement, the one-year return on investment for my business expenses was well over 350% percent. Although results can vary, this can certainly help you make an easier decision to do the same thing if you are in a similar position.
The one-year return on investment will be much less if your primary job does not flow through your PC. It turns out that $25,000-$40,000 in side income is usually the tipping point for making the formation of a PC cost-effective for your side work. This can vary based on your individual income and your overall household income.
When you take into consideration the business coaching, investing, accounting, tax, and legal services all fully integrated into the package for a complete PC-employment lite model, you could be looking at $20,000- to $30,000 for the comprehensive business setup. A similar amount would be expected for your PC’s annual maintenance. Again, in my opinion, this is well worth it and easily pays for itself.
Feasibility Evaluation
A qualified agency will typically provide a full feasibility evaluation before making this conversion to confirm that forming a PC will benefit your household financially. Ideally, they will do it via a side-by-side view that compares a “what if” version contrasting you without a PC vs. with a PC (and its tax-efficient business structures). They will also provide a full scope of services documenting and outlining how they will support the setup and operation of your small business.
When you form a PC, you will have many options for operating your business, but enlisting help from others will be your best move because of the way your business team will help you tap into and maximize all the physician-oriented benefits of a PC. We’ll check out those physician-centric dimensions in my next post.
